Jump in investment as pattern of the recovery changes

The pattern of the recovery changed in the final quarter of last year, according to details of national output published yesterday. A jump in investment and stockbuilding compensated for a lower contribution to growth from exports.

Gross domestic product increased by 3.9 per cent last year - slightly lower than the initial "flash" estimate. Its fourth quarter increase was unchanged at 0.8 per cent. The rise in the GDP deflator, the widest measure of prices in the economy, was the lowest since 1960 at 1.8 per cent.

In the fourth quarter, investment expenditure grew by 1.4 per cent, although this welcome jump was not enough to offset falls earlier in the year. The year-on-year rise in investment was 2.9 per cent - lower in this recovery than in previous cycles. Stockbuilding rebounded after a weak third quarter, and contributed 0.4 points of the 0.8 percentage point 4th quarter increase in GDP.

Trade's contribution to total GDP was negative, after strong gains in the second and third quarters. Consumer spending was stronger than expected - especially spending on durable goods apart from cars. It climbed 0.6 per cent in the quarter and 2.5 per cent in the year.

Analysing growth by category of output rather than expenditure, industrial production rose 0.5 per cent last quarter, taking it to a level 3 per cent higher than the the peak of the last business cycle - though manufacturing output has not yet regained its previous peak. Services output grew faster last quarter, rising 0.9 per cent.

The fastest-growing services category was transport and communications, helped by a rebound after the rail strike. Telecommunications are also expanding strongly.

Other fast-growing areas are professional and technical services, such as legal services, computer services and management consultancy. On the other hand, estate agency and advertising fell back at the end of the year. Accountancy expanded only weakly, while banking and finance were flat.

GDP has expanded 7.8 per cent from the trough of the recession in 1992. Its rise in the second half of last year was significantly slower than in the first half.

Most economists said yesterday's figures confirmed that the pace of recovery was slowing down. Michael Saunders at Salomon Brothers, said: ``The strength of exports may not be enough to outweigh the squeeze on domestic demand from tight fiscal policy and rising base rates.''

The latest forecast from the National Institute for Economic and Social Research, an independent research body, also shows growth slowing down. It predicts the economy will expand 3.2 per cent this year, partly because it assumes interest rates will continue to rise.

However, a new City forecast predicts faster growth this year than last. Andrew Cates, an economist at UBS, said consumer spending would revive thanks to rises in wages and the number of jobs, while investment spending would grow strongly.